Boy oh boy, bond funds are in big trouble if real rates continue to rise. Why? Upward trend in US rates + higher inflation + expensive valuations + crowded positioning = disappointment for most bond funds in Astoria’s view.
US 10-year real yields have gone from 70bps to 104bps in just 5 weeks! Why are US real rates rising? Solid corporate profits and a strong US economy are 2 key drivers in our view.
One did not need to have an exceptional model or a great forecaster to realize that the risk/reward for bonds was quite poor going into 2018.
And in case you weren’t aware inflation, on the margin, is rising. See the below chart which comes from the Federal Reserve Bank of NY. Yet another headwind for bond funds.
Source: Bloomberg, Astoria Portfolio Advisors
Astoria has been warning investors about the poor risks for traditional bond funds for some time now. Since Astoria began managing money in July 2017, we have been under-weight fixed income considerably, very short duration relative to our benchmark, and have avoided most traditional credit and interest rate spread products. Here is a note from Jan '18 where Astoria argued that investors should own as little fixed income as possible (Click here).
Investors have poured over $2 trillion into bond funds since 2009 (and the majority of those purchases were executed at relative poor prices in Astoria’s view). Remember that markets trade on the margin and the rate of change is what drives financial assets. Investors need to be forward looking when constructing portfolios (not backwards). Unfortunately, because managers tend to look in the rear-view mirror, most funds have disappointing performance results and investors fall short of their investment goals. At Astoria, our investment process is to be forward looking and to focus on the rate of change.
For those that are interested in viewing our equity, fixed income, commodity, and alternative ETF holdings across all of our portfolios, you can view them here.
Best, John Davi
Founder & CIO of Astoria
Any ETF Holdings shown are for illustrative purposes only and are subject to change at any time. For full disclosure, please refer to our website: https://www.astoriaadvisors.com/disclaimer
Disclosure: I am/we are long USMF, QEMM, JPIN, PDBC, SRLN, XLE, IGSB, KBWB, VMBS, VTEB, QAI, DXJ, IAU, CWB.